In a certain year, if your return on investment is 4.40% and the inflation rate during...

In a certain year, if your return on investment is 4.40% and the inflation rate during that same year is 1.20%, what is your real rate of return?

Expert Solution

Based on Fischer Relation,

Nominal rate = Real rate + Inflation

4.40% = Real rate + 1.20%

Real rate = 3.20%

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Some texts also quote Fischer Relation as:

(1 + Nominal rate) = (1 + Real Rate) * (1 + Inflation)

(1 + 4.40%) = (1 + Real rate) * (1 + 1.20%)

1.044 = (1 + Real rate) * 1.012

1 + real rate = 1.0316

Real rate = 0.0316 = 3.16%

jeff jeffy answered 2 years ago

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